Commodities Spotlight Podcasts

Shipping industry faces seismic shift in 2020 as sulfur cap looms

April 18, 2017 (6:00 mins)

In 2020 the shipping industry is facing its biggest change since the shift away from burning coal a century ago as the IMO is set to impose a new 0.5% sulfur cap on marine fuel emissions. S&P Global Platts associate director Paul Hickin and editorial lead for bunker news Jack Jordan assess the readiness of the industry for the changes ahead, as well as the likely options for shipowners in coping with the stricter emissions regulations.

The next two years look set to be difficult for the global shipping industry as it struggles to address problems of excess capacity, shifting trade flows, and global environmental regulations. Shipping companies appear to continually struggle to stay afloat.

Join our Global Head of Platts Ocean Intelligence, Jason Silber, to hear his views on the many challenges facing the shipping industry and address the matter that after a period of consolidation, the bunker industry is keeping a watchful eye on further bankruptcies.

Podcast Transcript

Hello and welcome to the S&P Global Platts Commodities Spotlight podcast. I’m Paul Hickin. The alarm bells are ringing for the bunker market after the International Maritime Organization in October decided to cut the global marine fuel sulfur content limit from 3.5% to 0.5% from the start of 2020. But so far it seems the industry is sleep-walking, or at least in a state of paralysis, as to what steps to take to be ready for this huge environmental and regulatory change.

These are challenging times. The bunker world is already reeling from the bankruptcy of South Korean container line Hanjin Shipping last year which added to jitters about the creditworthiness of shipowners, and demand is at a low ebb.

I’m here with Jack Jordan, editorial lead for bunker news, to discuss what many have described as the toughest times for the industry in more than a decade.

Jack, the lower IMO sulfur limit coming in in 2020 has been described as the biggest change for shipping since the move from coal to oil last century. Do you think the industry is ready for the changes coming in three years' time?

In short, no -- most shipowners aren't ready. They were holding off from doing anything much until the IMO made its decision in October. Now we know it's going to be 2020, and not postponed any further, a lot of companies are still uncertain about what to do next.

The choice for most is between shifting to a new blended 0.5% sulfur bunker fuel, which will be much more expensive than the fuel oil they're currently buying, or fitting a scrubber -- a bit of kit that cleans emissions on board the ship and allows you to keep burning the same fuel.

The trouble that everyone's running into is that no-one can say with any certainty what either fuel oil or 0.5% sulfur bunkers will cost in 2020. And without having a strong view of the price difference between the two, you can't make any kind of informed decision. In that environment we're going to see inertia continuing for the next couple of years at least.

Do you see scrubbers becoming the most popular response to the new sulfur cap?

Not in the short term, at least. The first thing to note is that there wouldn't be enough shipyard space in the world to retrofit all of the global fleet with scrubbers in the next three years. The other obvious point is that there's a large capital cost that comes with installing a scrubber -- about $3-5 million per vessel -- and you wouldn't want to spend that kind of money on a vessel that's going to be scrapped in a few years’ time. So with ships that have recently been built or are getting ordered at the moment it might become popular, but with older vessels the cost isn't worth it.

In the longer term I can see the idea becoming more mainstream though. The global refining industry is still going to have a lot of fuel oil to sell in 2020 and prices for it are likely to drop fairly sharply. And according to PIRA, an analytics unit of S&P Global Platts, we can expect to see just 1.4 million barrels per day of global middle distillate supply being added between 2016 and 2020, while demand is set to increase by 3.7 million barrels per day. That developing shortage should keep 0.5% sulfur bunker prices pretty high, so the savings for a ship using a scrubber could be quite big.

The problem then becomes scrubbers becoming a victim of their own success. If a large protion of the shipping industry starts installing them over the next ten years, fuel oil prices will start to be supported again and the price advantage will be much lower. So there could be a financial incentive for early adopters of the technology.

Do you think non-compliance will be widespread?

This is a topic that people seem to skirt around a bit, as no-one wants to be seen to be advocating breaking the law, but I think it could well be a problem in the early 2020s at least. You'd expect ships operating near US and European waters to be fairly well policed straight away, but outside of those areas it's hard to imagine there'll be a very tough inspection regime immediately in 2020. We've heard some estimates of as much as 50 million tonnes a year of non-compliant fuel oil demand remaining after 2020.

That said, I don't think a situation where there's a big variation in compliance in different geographical areas will be allowed to continue for long. Once people start to see where it is that people are complying less, there'll be more pressure from the companies that are complying and from countries enforcing the rules more strictly for inspection regimes to be toughened in those places. The technology for all of this may start to improve in the coming years as well, with increased use of drones to check ships' emissions or on-board emissions reporting.

And how is all of this going to affect shipping as a whole in the next few years? Will the state of the industry look a lot different in the 2020s?

Yes, absolutely. This is already an industry that's in consolidation and that's struggling to get the same access to credit that it used to have. There was a high-profile bankruptcy last year when Hanjin Shipping collapsed, and it wouldn't be surprising to see some more cases like that, especially once bunker costs jump in 2020.But this is also leading to mergers and vessel sharing agreements that may help to modernise the industry's practice.

The increasing regulation that shipping is starting to see is also bringing a lot of scrutiny with it, and while that can be uncomfortable it will also help to make things more professional. I think bunker suppliers in particular after 2020 will discover that they're working with buyers that are starting to become a lot more careful with their procurement strategies, and that's going to put a lot of pressure on their trading margins.

Thanks Jack. It certainly looks like the industry is facing some tough questions with some even tougher choices in order to answer them. We’ll be delving deeper into the IMO topic with a special report on the subject due out in May. Thanks for listening.